Talk Turns to Takeover as Bank One Changes CEOs

Interim CEO Verne Istock's appointment means a big move could be in the offing.
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Bank One's (ONE) - Get Report palace coup Tuesday removed John McCoy, the bank's long-serving chairman and CEO, clearing the way for a recovery at the ailing institution and making a takeover more likely, say analysts and investors.

The 56-year-old McCoy's position had been under threat since August, when the bank's credit card and consumer division

First USA

, acquired in 1997, started reporting disappointing results.

The bank's board named President Verne Istock acting CEO. John Hall, a Bank One board member, was elected nonexecutive chairman. The bank said in a statement Tuesday that it has set up a search committee, headed by Hall, to look for a permanent chairman and CEO. This committee will also consider Istock for the permanent CEO spot, the bank said.

Glass Half-Full

"This is a positive development for shareholders," says Joe Duwan, banks analyst at New York-based

Keefe Bruyette & Woods

, which hasn't done recent underwriting for Bank One. "This company needed a change in leadership." (Duwan rates Bank One a hold.)

"It's more likely that the bank will get sold now," says Jeff Miller, manager on the

Acadia Fund

, a financial services hedge fund based in Villanova, Pa., that doesn't hold Bank One.

Bank One's shares jumped 3 27/128, or 11%, Tuesday to close at 33 3/16. The three banks often tipped as possible buyers of Bank One include

Citigroup

(C) - Get Report

,

Chase

(CMB)

and

Wells Fargo

(WFC) - Get Report

. Citi and Chase shares rose 1.5% and 3.8%, respectively, Tuesday, while Wells was off 1.6%. (Chase and Citi declined comment and Wells didn't return a call. Bank One declined to comment beyond its press release and didn't make McCoy or Istock available for interviews.)

Red-Letter Day

Despite some lingering fears and doubts, analysts and investors are already seeing McCoy's departure as a watershed event.

First, he was perceived as the main obstacle to a takeover, due to his family's involvement with Bank One over three generations. "McCoy was more likely to say that the bank shouldn't be sold," says Lisa Welch, analyst on the

John Hancock

(FRBAX) - Get Report

Regional Bank fund, which owns Bank One. By contrast, Istock showed he was willing to sell out when his previous institution,

First Chicago NDB

, was bought by Bank One in 1998, Welch points out.

A new CEO could deploy more sweeping recovery initiatives than McCoy, says a bank stock hedge fund manager who requested anonymity and doesn't hold Bank One. "McCoy had a vested interested in his acquisitions First USA and First Chicago," this manager says. "A new CEO could just sell things off if he wanted to." Some observers have speculated this year that Bank One may sell off First USA while maintaining Bank One's independence.

Some Bank One followers have been concerned that McCoy got carried away with the heavily promoted Internet bank

WingspanBank.com

, launched this summer and expected to cost about $150 million in its first 12 months. "There needs to be more of a bottom-line focus at Bank One, which means it will be hard to justify a massive investment like Wingspan," says Keefe's Duwan.

Cut Up the Plastic

Until its sharp slowdown this summer, Bank One, the nation's fourth-largest bank, had relied on First USA as a major source of earnings growth. Problems in this unit forced the bank to cut its earnings outlook twice -- in

November as well as

August, pushing the stock a bruising 53% below its 52-week high at the close Monday. In an October management reshuffle, the bank said that McCoy was going to oversee efforts to rejuvenate First USA, leading some observers to believe that the board had made his tenure as CEO dependent on results in the division.

McCoy's departure may therefore be a sign that First USA's shortcomings aren't about to be reversed, although he said earlier this month that First USA had managed to stem the rate at which credit card customers were leaving. "Is the timing of this move indicative that the fourth quarter is going to be extra lousy?" asks Lanny Thorndike, a manager on the

(CENSX)

Century Shares Trust financial services mutual fund, which owns Bank One shares.

"There's a lot to be done at Bank One and it's a big job," says Felice Gelman, a manager at

Sunova Capital

, a New York financial services hedge fund that doesn't hold Bank One. Keefe's Duwan says that "it's certainly a possibility" that the bank may release more disappointing financial results after any non-McCoy-led management team has a cleanout.

And Gelman, while noting that a buyout of Bank One is now more likely, also says: "An acquirer would have to make an extraordinarily strong case that it could handle the integration risk."

People Watching

One bank stock analyst who requested anonymity says that First USA and other parts of the bank are salvageable. "Bank One's a good franchise, he says. And while he blames McCoy's leadership for the problems, "he hasn't been severely debilitating," he adds. (The analyst's firm has done underwriting for Bank One.)

Century Shares' Thorndike isn't taking Istock's candidacy for permanent CEO too seriously. According to Thorndike, Istock has lost two key colleagues that he would need to pursue properly a turnaround plan for Bank One. The two are former vice chairman David Vitale, who left in November, and Vice Chairman Richard Lehmann, who is scheduled to retire at the end of this month. Vitale didn't return a call and Lehmann couldn't be reached.

As for permanent replacements for McCoy, the only name bank stock experts were mentioning Tuesday was that of Jamie Dimon, former president at Citigroup. Dimon, as a former lieutenant of Citi co-CEO Sandy Weill, has a reputation for pleasing shareholders with value-creating restructurings. Dimon didn't respond to a request for comment.